Rob Sequin | Havana Journal
Over promise and under deliver should be the slogan of Leisure Canada.
Perhaps this phrase could serve as a warning to other Cuban real estate developers looking to start projects in a timely manner on Cuban land.
Of course the Cuban government doesn’t do many things quickly and I’m sure this is partially to blame for the extremely long delay regarding Leisure Canada’s development projects in Cuba but when it comes to hyping, perhaps even misrepresenting Leisure Canada’s state of real estate development in Cuba, the company is squarely to blame.
Cuba’s Real Estate Developer - NOT
Publicly traded Leisure Canada (CVE:LCN) has been touting itself as “Cuba’s leading Real Estate Developer” for many years yet the company has never broken ground in Cuba. That slogan was prominent on their website until recently yet the moniker lives on as the title of the website’s home page. Now it claims to be the “A leading Cuban investment company” and prominently features this image below.
Really? An investor’s paradise?
Interim Consolidated Financial Statements for the three and nine months ended September 30, 2010 and 2009 show total revenue of $93,680 with a net loss of $3,139,032. That’s one heck of an investment! The four largest costs are salaries, rent paid to Cuban government agencies, general office costs and professional services. Other significant costs are telecommunications and travel.
Also, a severance package of $226,000 was paid to former Executive Chairman Wally Berukoff, now with Red Lion Management.
Don’t get me wrong. I am pro-Capitalist and have no problem with any company investing in future projects or venture capital investing in a start up business but Leisure Canada is not a start up. It’s a publicly traded company and the company is burning through stockholder value and not just venture capital.
The recent press release titled Third Quarter Results regarding its real estate development projects states that the architectural, engineering and concept design plans for their hotel development project, in Havana’s Monte Barreto district, have been approved by the Cuban authorities.
However, In April 2007, almost four years ago, the company was granted surface rights to the Havana land with a statement saying this would lead to “groundbreaking of the 238-room Phase One by end of 2007” so this item is not news. The press release also states that the company has not even begun to even solicit proposals from contractors to begin construction. This would appear to be a misrepresentation of the facts.
A positive comment about the Cuban government approving 99 year leases in the press release is a newsworthy event for Leisure Canada yet the stock price barely changed on this major announcement.
The release stated “This paves the way for consumers to acquire leasehold real estate in Cuba under competitive financing conditions similar to other offerings in Mexico and the Caribbean.” I don’t know about other offerings in other countries but we all know Cuba is not like other countries so to compare real estate in Cuba to real estate in Mexico and other Caribbean countries also appears to be hype or at least a misrepresentation of common sense.
Management’s Discussion and Analysis for the three and nine month periods ended September 30, 2010 as of November 25, 2010:
The Company’s net loss and net loss per share for the nine month period ended September 30, 2010 was $3,135,837 and $0.02 (per diluted share), respectively, compared with $1,011,068 and $0.01 (per diluted share) during the same period in 2009. The significant changes period over period relate to the increase in consulting fees related to the hiring of a new CEO and CFO, the recognition of stock based compensation for new options issued in 2009 and 2010, legal fees incurred with respect to the termination of certain agreements with the former Executive Chairman of the Company and with companies controlled by the former Executive Chairman, and the settlement reached with the former Executive Chairman.
Seems to me like the only people making any money from an investment in Leisure Canada is the senior management and consultants.
New Management Team
>>>In June, long time CEO and Chairman Wally Berukoff stepped down as Chairman of the Board early October. Apparently this was the beginning of the transition to the new management team.
>>>Robin Conners was named in as CEO in August 2009 but may not have had control of the company until Mr. Berukoff resigned in June.
Leisure Canada Summary
Perhaps the company is in transition now that Mr. Berukoff is gone. If so, they have the burden of the past to overcome. However, they should also have the benefit of a ten year history of project planning (not development) in Cuba. So, breaking ground on any project in Cuba would certainly be a victory for Leisure Canada. However, should another Cuban real estate developer break ground on a major project before Leisure Canada does so in Cuba, I think that would be seen as a huge failure in the company’s current management.
You can see all the Leisure Canada press releases if you want to follow the financials and management changes.
Cuba Real Estate Development Projects
The Company and its joint venture, Bellavista Resorts SA has registered surface rights and development rights. Complete architectural, engineering and concept design plans have been approved by the Cuban authorities and all three phases of this project will be built concurrently. Specifications and project information have been compiled in order to begin a Request for Proposal process to select a general contractor.
The Company is also studying alternatives to underground parking and is working on detailed design components of the project and establishing a proactive value engineering analysis. Under the development agreement reached with the Cuban government, the Company through its subsidiary Wilton Properties Inc. has to match in costs the value of the land contributed by the Cuban Government of $10,350,000, after which costs on the project will be split 50-50.
The Company is continuing discussions with the Cuban authorities and officials in charge of tourism and foreign investment regarding the approval of certain feasibility studies submitted to the Cuban government and clarifying the recent announcements from the Cuban government allowing the construction and sale of residential real estate associated with resort and golf projects. The Company is awaiting the formal approval from the Cuban authorities on the preliminary master plan and development program for Jibacoa. The specific joint venture for this property has been created and the Company is renewing its development rights and is proceeding towards the registration of its surface rights in light of the new 99-year residential leases recently announced by the Cuban government.
In September 2009, the Company received the authorization from the Cuban Government on the preliminary master plan and renewed development rights and to proceed with the land development process on 260,000 m2 of beachfront property and in December 2009, the Company received site approval. We have commenced program design for an eco-resort of approximately 400 rooms and the Company is currently engaged in economic feasibility studies. The Company is proceeding with the creation of a specific joint venture for this property and the registration of its surface rights.
Risks and Uncertainties
Taken from same Management Discussion paper, “The Company’s financial position and its development projects may be affected by political or economic instability. These risks include exposure to fluctuations in currency exchange rates and high rates of inflation. While the Cuban Government is currently seeking to encourage foreign investment by removing certain restrictions on foreign investments and permitting foreign entities to repatriate profits from Cuba, there can be no assurance that this trend will continue.
Operations may be affected by varying degrees by such factors as government regulations with respect to price controls, income taxes, expropriation of property, environment legislation, land use, water use and land claims of Cuban nationals. The effect of these factors cannot be accurately predicted.
The Company is also dependent on the Cuban economy, which itself is highly dependent on external factors such as commodity pricing of oil and nickel, and the state of the world tourism market.”
My comment - Is Cuba somewhat to blame here? Of course. There have many news story in 2010 about the Cuban government reviewing and/or approving a variety of new Cuban golf course and vacation resorts complemented by Cuban villas and real estate “for sale”, none have broken ground yet. Trying to develop golf resorts in a Communist country with a centrally controlled economy is certainly like pushing a rock up hill. Leisure Canada should know this and not over-hype their development status. They are a publicly traded corporation with a responsibility to their shareholders.
Cuban Law and Commercial Practice
As is the case in many developing states, the commercial legal environment in Cuba is in a formative stage and accordingly, the legal rights of the Company and its subsidiaries may not be enforceable in Cuba to the same extent as they would be in a fully developed industrialized state, parliamentary democracy or market economy. The Company’s Development Agreement with Cuba provides for arbitration of disputes in Cuba and Cuba has, in the past, properly submitted to commercial arbitration and agreed to abide by the results thereof, but there can be no assurance that it will do so in the future.
Also, since Gran Caribe is an agency of the Cuban government, it may make decisions with respect to the development properties which are driven by non-commercial considerations. There can be no assurance, therefore, that actions by Gran Caribe, in respect of the Company’s joint venture, will always be in the best interests or consistent with the interests of the Company.
Under the Company’s Development Agreement with Cuba, Wilton is responsible for obtaining 50% of the financing of each development project by way of third party debt financing, with the remaining 50% to be contributed equally by way of equity from Gran Caribe and Wilton. If Wilton is unable to obtain such debt financing on reasonable commercial terms, Gran Caribe and Wilton must contribute equally by way of equity, the entire amount required for such development project.
If either Gran Caribe or Wilton fails to contribute its portion of the required equity, the other party may make a loan to the defaulting party or may contribute the amount of the equity required directly to the subsidiary and subsequently dilute the defaulting party’s share in such development project. There is no guarantee or assurance that the Company will be able to arrange third-party debt financing for 50% of the cost of each development project. There is also no guarantee or assurance that the Company will have or be able to raise the amount it will be required to contribute to any given development project in equity.
If Wilton is unable to contribute its equity portion to any given development project, Gran Caribe is entitled under the Development Agreement to dilute Wilton’s interest in such development project. There is also no guarantee or assurance that Gran Caribe will have or be able to contribute its portion of equity required to finance any given development project, in which case Wilton would be required to contribute the entire amount required to finance the development project. There is no assurance that the Company will have or be able to obtain the equity required to any development project on its own.
The Company has made significant progress in arranging prospective sources of financing for its development projects, but definitive terms and conditions, and agreements reflecting these, have not been finalized. There is no assurance that those terms, conditions and agreements acceptable to the Company will be completed on a timely basis.
US Laws Relating to Cuba
The various U.S. laws and regulations establishing the embargo have been amended from time to time, including the Cuban Liberty and Democratic Solidarity (LIBERTAD) Act of 1996, also known as the Helms-Burton Act (“Helms-Burton Act”), which extended the reach of the U.S. embargo. As a result, the Company is affected by these changing political and legal relationships between the U.S. and Cuba. Although the Company monitors and analyzes the potential impact of any anticipated changes and generally prepares to capitalize on any future opportunities or mitigate any increased risks, there is no assurance that the Company will not be adversely affected by changes in U.S. laws.
The Company is currently prohibited from accessing U.S. capital, debt, customers and suppliers, which limits its ability to mitigate the financial risks described above.
We have made every effort to ensure that the Company’s development projects are located on land which will not be subject to a claim which has been certified by the U.S. Foreign Claims Settlement Commission, the body responsible for dealing with U.S. nationals whose Cuban properties were confiscated by the Cuban government. However, there is no assurance that claims will not come to the attention of the Company or the U.S. government in the future.
The Company and its subsidiaries do not hold assets located in the U.S. The Foreign Extraterritorial Measures Act (Canada) provides that any judgment given under the Helms-Burton Act will not be recognized or enforceable in any manner in Canada. It also allows a Canadian corporation to sue and recover, in Canada, any loss or damage it may have suffered by reason of the enforcement of a Helms-Burton Act judgment abroad.
So, are you ready to buy some Leisure Canada stock? Are you ready to invest in Cuban real estate development projects?
The Carbonera Club project has been offering Cuban villas for sale yet there is no groundbreaking date for that project that I know of. To be fair, I have not heard of ANY groundbreaking of any new golf, course, marina or resort project in Cuba.
The biggest hotel owner/manager is Sol Melia in Cuba. I don’t think any foreign company comes close to Sol Melia with regards to a foreign business in the tourism industry. The company will be opening yet another Cuban hotel by the end of this year.
Since joint ventures are required for ALL development projects and since qualified large-scale construction contractors in Cuba are selected by the Cuban government, we may not see any ground breaking on any project for not just months but perhaps years.